One Bad Quarter Should Not Consign Abercrombie & Fitch Co. (ANF) to the Gallows

Abercrombie’s balance sheet oozes strength. The company has $556 million in excess cash, and enjoys just $15 million of short-term debt. It also has a long-term debt of just $131 million leading to a debt/equity ratio of less than 0.1. The company has $728 million in net working capital (current assests-current liabilities), a great deal of operating liquidity, while its net working capital ratio of 2.36 is demonstrative of its financial security. A look through the cash flows reveals a trailing operating cash flow of $585 million, of this just under half, some $278 million was spent on capital expenditures, increasing the firm’s investments in its future.

Comparative Analysis

Abercrombie & Fitch has a trailing earnings before interest, taxes, depreciation, and amortization (EBITDA) of $622 million, allowing us to calculate its trading multiple (market cap/EBITDA) of 5.98 times. We can find the enterprise value (EV) by adding the market cap of $3.72 billion with the total debt of $146 million and then subtracting the cash of $556 million. This gives us an EV of $3.310 billion, and consequently and EV/EBITDA of 5.32 times. The fact that this number is below the trading multiple is indicative of the financial strength on the firm.

From the comparative analysis, it is clear that the company is currently priced at a discount. Having said this, even though the weak quarterly sales are not expected to last or have long term consequences, we can never certain. Overall, I believe Abercrombie & Fitch Co. (NYSE:ANF) to be a good long term investment but I invite you to make your own choice.

The article One Bad Quarter Should Not Consign Abercrombie to the Gallows originally appeared on Fool.com and is written by Rupert Nicholson.

Rupert Nicholson might initiate a position in Abercrombie & Fitch in the next 24 hours. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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